‘The RBI stands diminished after demonetisation’

W

hen he demitted office in 2013, former finance minister P Chidambaram said he wanted to “travel, read and write”. While that is not all that he is doing, the busy lawyer and Rajya Sabha MP is certainly keen on using his writings to force his arguments. He has dished out the third collection of his weekly newspaper columns with a glowing foreword by former RBI Governor Raghuram G Rajan and Katherine Dusak Miller of the University of Chicago Fearless in Opposition: Power and Accountability (Rupa Publications). Elaborating on the themes he has written on, Chidambaram told BusinessLine about a suppressed note from the RBI opposing demonetisation, his forecast for growth and why he is critical of the stimulus packages during Pranab Mukherjee’s tenure as finance minister. Excerpts from the interview:

Do you have a view on Raghuram Rajan’s exit from the RBI and demonetisation that followed not shortly afterwards?

One of the reasons why they did not extend Rajan’s tenure was that he was implacably opposed to demonetisation. They had to find somebody who could be nudged to accept their view. There is a story going around that the RBI, after Rajan demitted office, sent a five-page note to the Prime Minister’s Office against demonetisation. If there is such a note, it is only appropriate that the Government makes that note public so that it can add to the debate.

The RBI stands diminished after November 8, 2016. As facts tumble out, it is absolutely clear that the Government virtually directed the RBI to accept its suggestion and report back post-haste. This is what the RBI did, after holding a meeting for no more than 30 minutes with only two independent directors. The cabinet was waiting. How did the Cabinet know that the RBI will recommend demonetisation unless they had reached a deal earlier?

Apparently, the Prime Minister told his cabinet that he had decided to demonetise the currency and they had received the formal recommendation from the RBI and then asked the ministers to stay put and went and announced it on television. Where is the background note prepared by the RBI for its directors’ meeting? Where is the agenda paper for the RBI board meeting? Where is the cabinet note for the Cabinet meeting? Where are the minutes of the Cabinet meeting?At least two Governors – YV Reddy and Bimal Jalan — have spoken about the damage done to the RBI’s reputation.

The PM has described demonetisation as a strategy to empower the poor who have been kept in poverty by an entitled class. You have to concede that the PM succeeds in taking the lead in framing the debate and dominating political narrative.

For whatever reason they did demonetisation, they did it without full information, full facts and without any clarity about whether their objectives would be fulfilled. None of the objectives specified by the Prime Minister have been met or will be met. So they changed the narrative to cashless society. That was pooh-poohed. We pointed out that Germany and Austria have got 80 per cent of their transactions as cash. Even the mighty United States has 46 per cent cash transactions. Now, they have changed the narrative again and asserted that this was done to empower the poor.

How do they empower the poor? Close to 15 crore people are casual, manual labourers. About 25 crore people are self-employed and depend on a daily income. They have impoverished 40 crore people in those six weeks following demonetisation. Many of them are in deep debt. Far from empowering the people, they heaped misery upon the people. But they will change the narrative again and again. Let us wait for the five State election results. Depending upon the election results, they will change the narrative again. You should note that in his reply, the PM did not speak about the cashless society. Now it is about empowering the poor.

What is the confusion you point out about GDP numbers?

We don’t know what the correct GDP number is! What it shows is that there is no one in the Finance Ministry who has got a complete grip over the economic situation of the country. From time to time, various suggestions and “solutions” are offered. I think the Government grabs the one that appears to be the most appealing. Take the GDP number story. The CSO has not given any Revised Estimate for 2016-17, yet the Budget papers put out a figure for the Revised Estimate for 2016-17. Where is that Revised Estimate? The CSO has only put out an Advanced Estimate. The CSO has not put out a Revised Estimate. And only the CSO can put out a Revised Estimate. Yet the Budget documents mention the figure of ₹150,57,429 as Revised GDP Estimate for 2016-17. How is the finance ministry competent to give a number for GDP?

What seems to be the prediction for growth post-demonetisation?

From their numbers, it is very clear 2016-17 will end in sub-6.5 per cent growth. That’s a given now. I don’t think anybody can challenge that. Going forward it will again be around 6.5 per cent. Which means every year they have knocked off 1 per cent of GDP growth from where it ought to have been if this disruption had not taken place. One per cent of GDP is about ₹1.50 lakh-₹1.60 lakh crore.

You said in your book that your argument that the contrary view of the CEA should be over-ruled and the Government should stick to the path of fiscal discipline has been accepted by the BJP. But you have also pointed out that not only is the Government slipping on the fiscal deficit targets, the expenditure has simultaneously gone down. Can you explain?

There are obviously two views within the Government on the approach to fiscal deficit — one is that of the CEA’s and other is that of the RBI and perhaps some official in the Department of Economic Affairs and the Department of Expenditure. Torn between these two views, the Government is fumbling. In four Budgets in three years, they have pushed the target date twice. First they did it in 2015-16 when they set a target of 3.9 per cent as against a target of 3.6 per cent.

As it turned out, the CGA and the CAG have now reported that the actual was 4.31 per cent. So they have hopelessly slipped in 2015-16. Now again in 2017-18 when they should achieved 3 per cent, they have set a target of 3.2. They are slipping for the second time. How they achieved this target of 3.2 per cent is by contracting expenditure. The total expenditure of the Government as a percentage of GDP has fallen by almost 0.6 per cent. They don’t spend enough. But even after contracting expenditure, they do not achieve the fiscal deficit target. Which is why I say their approach is completely ambivalent and there is no conviction about walking on the path of fiscal prudence.

The UPA too fumbled on fiscal deficit targets and there were clearly two views on expenditure-versus-fiscal prudence.

The first UPA was clearly on the path of fiscal consolidation and we achieved the target of 3 per cent in 2007-08. Then came the international financial crisis and two months later, I moved out of the finance ministry. And my successor adopted the opposite approach, what we call the textbook approach — that we spend when the economy is on a downturn. That resulted in breaching the fiscal deficit target and as a consequence, the inflation targets. When I returned to the finance ministry in August, 2012, we again chalked out a new fiscal consolidation path thanks to Vijay Kelkar and his committee and we started compressing the fiscal deficit again. We achieved quite a bit by the time we demitted office. We left it at 4.1 in 2014-15 in the interim Budget. The see-saw was because of the international financial crisis and we did not adhere to a fiscal consolidation path between 2009-10, 2010-11 and 2011-12. I have also expressed my reservations about that period by saying that while the first stimulus package was correct, the second and third were perhaps avoidable.

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